VCE Economics Unit 2

Economic Activity

The process of making or selling goods and services.

Economic Activities

Use scarce resources to produce and sell goods and services in exchange for money, to earn income, and to make a living.

Non-economic Activities

Not sold for money but are done for emotional reasons, concerns for others, or on a volunteer basis.

Gross Domestic Product

A measure of the total value of a nation’s output of finished goods and services resulting from all types of economic activities. 

Activities such as selling on the black market and undeclared work done for cash, which involve the payment of income, are also present. However, the value of these activities is unknown.

Purpose of economic activity

The purpose of economic activity is to combat the problem of relative scarcity.

Living Standards

Our general level of wellbeing.

Material Living Standards

Affected by the annual average level of income and consumption per person per year.

Non-Material Living Standards

Reflects the quality of daily life. Eg. Happiness, life expectancy, freedom, crime rates, mental and physical health.

Increased Economic Activity effects on Material Living Standards

Up to a point, standards are lifted. Higher production generally results in increased jobs and incomes, boosting consumption spending. If economic activity becomes too strong, this can cause prices to rise, reducing the purchasing power of incomes.

Increased Economic Activity effects on Non-Material Living Standards

Most aspects benefit from higher levels of economic activity. Eg. When production expands, employment and income rise, aiding in reducing stress and social isolation, improving physical and mental health. However, environmental outcomes are likely to suffer because of increased pollution, accelerated climate change, and the faster depletion of non-renewable natural resources.

Decreased Economic Activity effects on Material Living Standards

Cause low employment, incomes and consumption.

Decreased Economic Activity effects on Non-Material Living Standards

Undermines the quality of life, causing social isolation, unhappiness, and possibly higher crime rates. However, there is less pollution and pressure on the environment, which is beneficial for our wellbeing.

The Five Sector Flow Model

The Household Sector

Contains around 27 million consumers and spenders. Households make spending decisions, but also supply and sell resources to the business sector.

The Business Sector

Consists of over 2.7 million trading enterprises. They supply or sell finished goods and services, using resources purchased from households. Businesses also make decisions about investment levels, production, and the number of staff they employ.

The Financial Sector

Organisations such as banks, credit unions, stock exchanges, and life insurance companies. They collect or borrow household savings from individuals and re-lend them as credit to businesses wanting to expand their operations through investment spending.

The Government Sector

Activities and decisions of federal, state, and local governments. It collects tax revenue from those earning income and then uses this to help pay for government spending on the provision of goods and services for the community.

The Overseas Sector

Includes Australian residents' spending on imports and spending by people overseas on our exports.

Flow 1 (Resources Available)

The supply of resources over a while from the household sector to the business sector. A nation’s productive capacity, potential output, and supply of goods and services are determined by the volume and efficiency of these productive resources. Countries can't produce more than their production capacity, so the expansion of resources is vital.

Flow 2 (Total Incomes)

The payment of total income over a period to those households that have sold resources. It represents the demand by businesses for resources. The more resources bought by firms each year, the higher the employment rate and the total level of national income.

Flow 3 (Total Spending)

Aggregate demand, or total annual spending on Australian-made goods and services, measured over some time. This reflects the spending decisions of firms. 

The value of total leakages relative to total injections determines this level. Decisions that raise leakages will slow AD, whilst decisions that cause leakages to fall will accelerate AD. Only when the total value of injections equals the total value of leakages will AD and the economy be stable.

Flow 4 (Total Production)

The annual value of a nation’s production or supply of finished goods and services. The size of this flow is measured by GDP. Whether the actual GDP of the economy is at its maximum or potential level, depends on the strength of spending or AD.

Explaining an Increase in Economic Activity (A Boom)

An increase in economic activity occurs when total injections rise relative to total leakages. Here is the sequence of events:

Injections increase: More money enters the economy through business investment (I), government spending (G), and exports (X).

Aggregate Demand (AD) rises: The increase in injections boosts the total value of spending on Australian goods,

Businesses respond: Firms notice an increase in sales and orders, and their stocks of unsold goods decrease.

Production increases: In response to higher demand, businesses collectively increase their output, which boosts the level of economic activity and GDP.

Knock-on effects: This higher activity leads to a need for more resources, including labor, which in turn increases incomes for households. This rise in income allows for more spending, continuing the cycle. Higher spending can also lead to widespread shortages and accelerate inflation, potentially causing a boom.

Explaining an Increase in Economic Activity (A Recession)

In reverse, a decrease in economic activity occurs when total leakages rise relative to total injections. Here is the sequence of events:

Leakages increase: More money leaves the economy through savings (S), taxes (T), and imports (M).

Aggregate Demand (AD) slows: The increase in leakages reduces the total value of spending on Australian-made goods and services.

Businesses respond: Firms see a drop in sales and orders, and their stocks of unsold goods increase.

Production decreases: In response to lower demand, businesses collectively cut production, which reduces the level of economic activity and GDP.

Knock-on effects: This decline in activity means businesses purchase fewer resources and labor, leading to falling incomes for households. Lower incomes result in less spending, reinforcing the downturn. Reduced spending is also likely to cause a slowdown in inflation as businesses cut prices to clear excess stock.

The Business Cycle

The business cycle depicts the rise and fall in output over time. Each business cycle has four phases.

Economic Expansion (Business Cycle)

The upswing of the business cycle towards a peak.

• Increase in production (demand)

• Decrease in unemployment (more hiring)

• Increase in wages (attract and keep workers by offering higher wages)

• Increase in consumer spending (More wages cause more spending)

Economic Contraction (Business Cycle)

The downswing of the cycle towards a trough.

• Decrease in production (fewer sales)

• Increase in unemployment (Less demand, fewer workers needed)

• Decrease in wages (Workers are willing to accept lower wages, more competition)

• Decrease in consumer spending

Boom (Business Cycle)

A period of strong economic expansion where many businesses are operating at full capacity or above capacity, and the unemployment rate is very low. Income and production are at very high levels. This can lead to rapid growth in prices.

Recession (Business Cycle)

When the output has fallen for some time, and the unemployment rate increases.

Depression (Business Cycle)

A severe recession. There is a large contraction in the economy, and the unemployment rate is likely to be at a very high level.

Inflation

An increase in the price of the goods and services that households buy. It is measured as the rate of change of those prices. Typically, prices rise over time, but prices can also fall (deflation). The Consumer Price Index (CPI) measures the change in the price of a typical basket of goods and services consumed by households. The inflation rate is the percentage change in the price of this basket over time.

Inflation during an Expansion

Consumers demand more output, and businesses produce more to meet this increased demand, but they will eventually reach production capacity. There will be more demand than output available, raising prices.

Inflation during a Contraction

As consumers demand less, businesses produce less output. Some businesses may lower their prices or offer discounts to increase sales. This leads to lower inflation or deflation.

Why must inflation be managed?

A low steady rate is optimal, but if it is too high, the currency loses its value. Rapid inflation is called hyperinflation.

Economic Indicators

Economic indicators are used to monitor activity and evaluate government policies, and to use current data to predict the future.

Leading Indicators

• The early warning signs that the economy is at, or approaching, the peak/boom phase of the business cycle.

• They are forward-looking & able to provide some insight into future trends or changes in Economic activity.

• It can help to predict where the economy may be heading shortly. 

• Not completely reliable.

Leading Indicator examples

• Consumer Confidence levels

• Business Confidence levels

• Index of new housing approvals

• Hiring intentions of businesses

• Volume of planning/building permits

• Loan approvals

• Job vacancy rates

Coincident Indicators

• Move very closely with actual changes in the level of economic activity. 

• These allow us to locate our current position on the business cycle. 

• They are collected and published regularly at shorter intervals and thus more or less tell us what is happening right now. 

• It is coincident indicators that essentially determine where an economy is in terms of the business cycle.

Coincident Indicator examples

• Share prices

• Monthly retail sales (Sales volumes)

• New car registrations

• Hours worked

• Business inventory levels

• Payroll figures

• Interest rates

• Exchange rates

Lagging Indicators

• Lagging indicators of economic activity only tell us the level of activity that occurred some time ago. 

• While generally more accurate or certain than leading indicators, these statistics do not tell us what the economy is doing right now. 

• They only look backwards to where we were once located. 

• GDP figures fall into this lagging indicator category, since by the time quarterly production statistics are collected by the ABS, processed and released, typically three months or so have elapsed.

Lagging Indicator examples

Apart from GDP, other lagging indicators of changing levels of economic activity might include:

• The unemployment rate (takes time for firms to hire or fire employees after a change in sales and output)

• The inflation rate (the general change in the prices paid for a basket of goods and services takes time to reflect changes in economic conditions)

• Average weekly earnings (wages are sticky and take time to respond to changes in the business cycle)

Business Cycle Stage and Effects Summary

Stage 1 - PEAK/BOOM PHASE 

• Strong growth

• Consumer/business confidence high 

• Encourages spending & loans,   savings & demand for labour   (unemployment very low)

• If peak becomes boom = excessive/unsustainable growth

• Inflationary pressure

• Import purchases 

Stage 2 - CONTRACTION OR DOWNTURN PHASE

• Market correction begins due to excessive rates of inflation, higher interest rates & capacity constraints

• Leads to   consumption/investment as households save and reduce debt  = slower economic growth

• Demand for labour  , resources unemployed, consumer/business confidence   & inflation falls

Stage 3 - TROUGH PHASE

•  Level of economic activity reaches minimum point (possible recession)

•  Low or negative GDP =    unemployment, inflation falls as spare capacity in many markets

• When was Australia’s last recession?

Stage 4 - RECOVERY PHASE

•  Conditions of a trough will spark an economic recovery

•  Consumption, Investment, net exports   = growth promoted   in production, employment, income & expenditure

•  Lead to economic activity

•  Economy recovers until next peak & the cycle continues

Domestic Economic Stability

Domestic economic stability is attained when full employment, sustained economic growth, and price stability are achieved simultaneously. (When Macroeconomic goals and targets are met)

1. Strong and sustainable economic growth (GDP 3%)

2. Low and stable inflation (prices) (2-3%)

3. Full employment (4-4.5% natural)

Aggregate Demand and Its Importance

The combined or total annual value of spending by households, governments and net overseas transactions on Australian-made goods and services.

AD determines the cyclical level of economic activity

• Cyclical expansions and contractions in the business cycle are largely caused by increases or decreases in AD

• Changes in AD can be caused by changes in leakages relative to injections

Aggregate Demand Formula

Components of AD

C - Household Expenditure: Satisfying needs, wants, and services required 60%

I - Private Business Capital Spending: Spending on products used to make other goods, often designed to grow businesses. 22%

G1- Public Expenditure on the community goods and services: Staff wages for government departments, such as politicians, as well as defence spending and day to day running costs (telephone calls). 17%

G2 - Government Capital or Investment Expenditure on equipment needed for the provision of public social and economic infrastructure: Schools, hospitals, roads, railways, telecommunications networks. 3%

X-M - Net Exports: Difference between foreign spending on Australian exports minus our spending on imports. 4%

How AD increases Economic Activity

A period of expansion in GDP is generally caused by stronger growth in AD. This reflects lower leakages and/or higher injections. When businesses see AD or sales rise and levels of unsold stocks fall, they lift their output (as long as there is some unused or spare productive capacity available). This causes GDP to rise, increasing the demand for resources, creating more jobs and growing national incomes. It is also likely that inflation will gradually accelerate.

How AD decreases Economic Activity

A period of slowdown in GDP is largely the result of a weaker growth in AD. This reflects higher leakages and/or lower injections. When businesses experience a drop in spending and sales, leading to unplanned increases in inventory, they reduce their output, causing GDP to slow. In turn, the demand for resources falls, unemployment rises and national income declines — typical characteristics of a recession.

Factors that may influence AD

• Disposable income

• Interest rates

• Consumer confidence

• Business confidence

• The exchange rate 

• Rates of economic growth overseas

Household Consumption Spending Effect on Aggregate Demand

Private consumption spending by Australian households. A rise in this will directly stimulate AD, economic activity, GDP, employment of available resources, and incomes.

• A drop in disposable income slows consumption spending, and a higher disposable income accelerates it.

• Greater consumer confidence leads to reduced savings and more consumption, and lower confidence slows consumption and increases savings. 

• Higher interest rates encourage savings and discourage borrowing. Lower interest rates help to life consumption spending and discourage savings. This boosts AD.

• Higher population growth tends to accelerate consumption and AD.

Government budgetary policies may cause cuts in personal income taxes, increasing disposable income, consumption, and AD.

Private Investment Spending Effect on Aggregate Demand

An injection (more spending) would increase AD, economic activity, GDP, employment, and incomes.

• Business confidence signals expectations about levels of future sales and profits. Pessimism leads to reduced investment spending and AD.

• Higher interest rates discourage spending, and lower rates encourage AD.

Company tax rates affect the after-tax profits. Lower rates encourage new investment spending designed to expand operations.

Government Spending Effect on Aggregate Demand

An injection in the economy that involves the provision of goods and services for the community. Increases tend to boost AD, economic activity, GDP, employment, and incomes.

• Often increases when the unemployment rate rises, as this can help life AD and reduce the severity of a recession. In inflation booms, the government may also slow spending.

• Often decreases when inflation rises, as it helps to restrain AD and reduces the shortage of goods and services that cause inflationary pressures.

• Often rises when population growth increases, as there is more community services needed.

If the government spends more than it receives in taxes, it will have to borrow money. This adds to public debt. Concern about high public debt can help slow government spending.

Import Spending Effect on Aggregate Demand

Spending decisions made by local consumers are leakages in the circular flow. Spending more on imports slows AD.

• A fall in the exchange rate for the A$ may make imports less attractive.

• If there is stronger consumer and business confidence and higher local economic activity, this often results in more spending on imports, where leakages slow AD. In reverse, weaker conditions and recession here in Australia usually mean lower spending on imports.

• Greater household and business optimism locally usually result in more spending on imports, slowing AD. Pessimism boosts AD.

• Higher inflation rates at home makes overseas goods and services more attractive, increasing imports and leakages, slowing AD.

Change in the exchange rate for the A$ against the alue of other currencies will affect the price of imports for us. A fall in the A$ makes the imports dearer, slowing their attractieness. This boosted AD. A rise in the Australian dollar (A$) slows AD and economic activity.

The AD Curve

The AD curve represents the total spending in the whole economy - not just on one particular good or service.

Over a period of time, people buying Australian-produced goods and services may increase or decrease their level of expenditure at a given price to reflect new conditions of aggregate demand.

Stronger demand side conditions = shift to the right from AD1 to AD2

Weaker demand side conditions = shift to the left from AD1 to AD0

Aggregate Supply

Aggregate supply refers to the total volume of goods and services that a nation’s producers are willing and able to produce at a given price over some time to satisfy aggregate demand. Aggregate supply factors affect an economy’s production capacity.

When there are idle resources, firms can increase production as AD rises, without much price change. But as the economy nears productive capacity, it becomes harder to find resources. If AD keeps rising, prices increase faster. Once full capacity is reached, output can’t grow further—so prices surge, leading to rapid inflation.

Aggregate Supply Curve

It shows the amount of goods that can be produced at different price levels. When the economy reaches its level of full capacity (full employment/ economy is in the PPF), the aggregate supply curve becomes inelastic (unresponsive to price rises). The aggregate supply sure is related to the PPF, and both show production capacity of an economy.

Over time, as supply side conditions become more or less favourable, the AS curve can shift outward (to the right) or inward (to the left).

Favorable Aggregate Supply Conditions

More favourable aggregate supply conditions involve producers having access to extra resources, lower production costs and stronger business profits. This acts as an incentive to make firms more willing and/or able to expand their productive capacity. In this situation, the potential rate of economic activity, GDP, employment, and incomes can readily increase, without adding to inflation.

Less Favorable Aggregate Supply Conditions

Less favourable aggregate supply conditions like reduced access to resources, supply chain issues, higher costs, or lower profits, act as a disincentive. They cause producers to become less willing and/or able to produce, contracting productive capacity, the potential rate of economic activity, employment, and incomes, and adding to inflationary pressures.

Factors Affecting Aggregate Supply

• Quantity and quality of the factors of production (resources)

• Costs of production

• Technological change

• Productivity growth

• Climactic conditions

• Interest rates

Labour Resource Availability Effect on Aggregate Supply

(Provide mental talents and physical power)

Demographics and the population’s age structure: The size and age structure of the population affect the labour force. Population growth through births or migration (e.g. immigration) can increase the number and skills of workers. However, Australia’s ageing population is causing labour shortages, limiting productive capacity and aggregate supply.

Education, skills, and labour productivity:Higher labour productivity means more output per worker and is often measured by GDP per hour worked. It’s influenced by education, training, skills, and innovation. Government spending (e.g. free or subsidised training) can boost productivity, growing productive capacity and aggregate supply.

Investment levels: The quantity and quality of capital resources is increased through high levels of private and government investment in new plant and equipment. Increased investment can also come from foreign capital inflow used to set up or finance new firms. These grow productive capacity and AS.

Capital Resource Availability Effect on Aggregate Supply

Interest rates: Borrowing credit can help expand productive capacity and perhaps grow business profitability. Lower interest rates tend to increase investment in new equipment, while higher interest rates deter investment, slowing the growth in productive capacity and AS.

Outlays on technology and R&D: The use of new technology like robotics in various industries such as manufacturing, warehousing, and medicine, along with investments in research and development (R&D), can help increase the volume and efficiency of capital resources, adding to productive capacity and AS.

Natural Resource Availability Effect on Aggregate Supply

Mineral exploration: Exploration can help us find new deposits of minerals. This can increase the quantity of resources available, and hence grow productive capacity, AS, and the potential level of GDP.

Land management: Lifting the productivity of land and the sustainability of mining and farming practices, can help grow Australia’s productive capacity and our potential level of GDP. In reverse, poor management will eventually see capacity shrink.

Climate change and severe weather events: Increased carbon emissions, global warming and severe weather events are limiting the growth in productive capacity and AS. Floods, drought, and fires have destroyed some businesses and infrastructure. To grow capacity, it is now essential that we have policies in place designed to reduce global warming, perhaps by putting a price on carbon emissions (e.g. a tax or the introduction of a carbon emissions trading scheme).

Level of Production costs and after-tax profits for businesses Effect on Aggregate Supply

Rates of taxation: Rates of company tax affect after-tax profits and hence alter the willingness and ability of firms to expand. Currently, higher rates of tax in Australia, compared with many countries, act as a disincentive, make local firms less internationally competitive, drive firms to relocate overseas and hence restrict the growth in Australia’s productive capacity, potential GDP, and AS.

Government outlays on infrastructure: Infrastructure includes roads, rail, shipping ports, airports, water and power supply, and telecommunications. It is used by businesses to produce other goods and services. If there is congestion and inadequate provision of infrastructure, production costs are higher, businesses are less internationally competitive and profitable, and capacity is more limited. This restricts AS and the potential level of GDP.

Economic Growth

 It exists when a country’s economy grows as a result of increasing economic activity. It occurs when there's a rise in the total volume of goods and services produced by a nation from one year to another. This means there is more being produced and made available for consumers, helping to increase some aspects of living standards.

Measuring Economic Growth using changes in GDP

The most common measure of economic growth is the percentage of gross domestic product, either quarterly or annually.

GDP  statistics attempt to estimate the total annual value of goods and services produced or sold by a nation. When we calculate GDP, we remove inflation/deflation statistically. Therefore, we look at how the size of the economy has changed, not the prices.

Limitations of using GDP to measure Economic Growth

Chain volume GDP is only an estimation. Its measurement is complex and it uses huge quantities of data from various sources.

1. Some products are not counted in GDP:

Non-marketed goods and services are excluded as they are too hard to measure. This makes GDP an underestimation of the change in the real level of national output.

• Personal home production

• Cash work

• Black market

• Value of goods and services produced by unpaid workers

2. The value of some production must be imputed or ‘guesstimated’.

The ABS are forced to guess the value of some goods and services that are produced but not marketed in the normal way. This may lead to inaccuracies.

• The value of farm production that is consumed on the farm and not sold.

• Annual value of accommodation provided by houses occupied by their owners.

Measuring Changes in Economic Growth Formula

Benefits of Economic Growth

Strong economic growth leads to a variety of potential economic benefits, including growth in material living standards, improved non-material living standards, employment opportunities and economic development.

Benefits of Economic Growth: Strong growth creates new employment opportunities and lowers unemployment

Strong economic growth and rises in real GDP create extra jobs, helping to keep unemployment rates at lower levels. Indeed, one of the Australian government’s important aims is to achieve the goal of full employment. This is defined as the lowest rate of unemployment, perhaps at around 4.0 to 4.5 per cent of the labour force, that does not cause inflation to accelerate. By contrast, weaker rates of economic growth, below 2 per cent, mean that cyclical unemployment soon rises. For example, during the COVID-19-induced recession in 2020, annual GDP growth was 0 per cent.

Benefits of Economic Growth: Increases material living standards and personal incomes

In general, income is earned by those who sell resources to the business sector and take part in the production of goods and services. The more people produce and sell thereby growing GDP, the more income is earnt. One measure of material living standards is real GDP per capita. Its level is very closely related to average incomes per head and can be calculated as follows:

When economic growth is strong, (and GDP is rising at a faster rate than the rate of increase in our population size), average per capita incomes and consumption levels increase. This is because to lift production, firms employ more resources including labour. As a result, wages and total incomes rise.

Benefits of Economic Growth: Strong growth improves the government’s finances and its capacity to provide services and welfare

• Another benefit of a strongly growing economy is that there should be an increase in average incomes, with fewer people unemployed. This also means that there will usually be a rise in the amount of revenue collected by the federal government from personal income and other types of tax (such as that collected from company profits, and from the goods and services tax). 

• This strengthens the government’s finances and budget position and is ultimately beneficial for our material living standards. For example:

• The extra government revenue generated from strong economic growth can be used by the government to better help the neediest individuals in our society through the payment of more generous cash welfare benefits (e.g. to the unemployed, families, sick, aged and veterans), allowing these people to enjoy reasonable living standards.

Benefits of Economic Growth: Strong growth can improve non-material standards

Economic growth can improve our lives beyond just income. It enables more leisure, better health, environmental care, cultural enrichment, and job satisfaction. It also reduces unemployment and poverty.

However, it also lowers unemployment, which otherwise leads to poor mental health, family stress, and higher youth crime.

Costs of Economic Growth: Economic Costs

• Resource Limits: Overuse of finite natural resources today may harm future prosperity.

• Inflation Risk: Excessive growth can trigger inflation, reducing purchasing power and living standards.

• Structural Unemployment: Growth-driven tech changes and global outsourcing can displace workers, even as overall jobs increase.

Costs of Economic Growth: Environmental Costs

1. Resource Overuse: Growth often depletes common access resources like clean air and water, harming future prosperity.

2. Climate Acceleration: Increased production and consumption drive global warming, causing extreme weather, rising seas, and ecosystem damage.

3. Economic Backlash: Climate change slows GDP growth, reduces crop yields, and worsens food and water insecurity.

4. Health & Inequality: Pollution and heatwaves harm global health, while low-income nations suffer most despite contributing least.

Costs of Economic Growth: Social Costs

• Less Leisure & Health Strain: Long hours and low wages reduce free time and increase stress-related health issues.

• Family Impact: Overwork leads to underparenting, exposing children to social risks.

• Rising Inequality: Without strong policy, growth benefits the wealthy more, weakening public services and widening income gaps.

• Affluenza: In wealthy societies, obsession with material success can damage relationships and mental health, leaving people unfulfilled.

Limitations of Using Real GDP as a Measure of Living Standards

• Chain volume GDP (real GDP adjusted for inflation) is often wrongly seen as a direct measure of living standards.

• A major flaw: GDP alone doesn’t account for population size, so it lacks relevance to individual wellbeing.

• To assess material living standards, we need real GDP per capita (GDP ÷ population).

• Even GDP per capita doesn’t reflect non-material aspects like quality of , health, or happiness.

Limitations of Using Real GDP as a Measure of Material Living Standards

• Masks income inequality – doesn’t show how evenly goods, services, and incomes are shared. In Australia, top 20% earn ~40% of income; bottom 20% earn ~7%.

• Excludes unpaid home production (e.g., housework, parenting, gardening).

• Excludes cash economy (undeclared paid work).

• Excludes black economy (illegal activities).

• Excludes value of volunteer work.

• Relies on imputed/estimated values for some goods and services. Eg. farm goods consumed on-farm, owner-occupied housing value.

Limitations of Using Real GDP as a Measure of Non-Material Living Standards

Negative externalities (i.e. the environmental and other costs imposed on third parties not connected with the economic activity that result from growing the production and/or consumption of goods and services) are not taken into account in calculating real GDP per capita. There are many examples of such external costs resulting from increasing production that undermine our wellbeing, yet are ignored in GDP. For example:

• the loss of leisure time for families to spend together due to the pressures of work

• youth problems caused by more adults working long hours and under-parenting of children

• increased stress levels and loss of job satisfaction due to pressure to be more efficient and work harder

• the destruction of the natural environment — for example, the exploitation and depletion of environmental or common access resources

• the costs to current and future generations of generating carbon pollution (CO2), that accelerates global warming and climate change.

Because these external costs are not subtracted from the annual value of production, using real GDP per capita as a measure greatly exaggerates our actual living standards.